A regulatory regime and the new Basel Capital Accord

The purpose of this paper is to set the proposed new capital adequacy arrangements in the wider context of what is termed a regulatory regime. The central theme is that the components of the regulatory regime need to be combined in an overall regulatory strategy, and that while all the components are necessary, none alone is sufficient. The optimum mix of the components of the regime changes over time as market conditions and compliance culture change. It is argued that, in current conditions, there needs to be a shift within the regime in five dimensions. The proposed new Accord is discussed in terms of this regulatory regime paradigm. The Accord is a welcome move in the direction of a broader approach to bank regulation and a recognition that other mechanisms (notably an enhanced role for market discipline) are needed.